The insurance industry exists for the purpose of protecting clients from unexpected losses. Typically, an insurance actuary calculates (or estimates) the probability and frequency of a loss, adds a safety margin and then charges a premium based upon the calculated probabilities.
On the average, insurance companies are profitable based upon their ability to accurately calculate the probability and frequency of losses and upon their ability to efficiently process claims. To efficiently process claims, an insurance company must be able to detect and recognize fraudulent claims without interfering with the processing of valid claims.
It has been generally recognized that fraudulent claims form a very small portion of the total claims filed in any given time period. In addition, when a small amount of money is involved, insurance companies frequently find that it is more cost effective to pay claims rather than to investigate such claims.
In general, the greatest number of property claims consists of small claims. It has been recognized by experts in property claims that approximately 75% of all property claims submitted to the insurance and risk management industry are under $25,000. Of this, approximately 50% are under $15,000 and 25% are under $10,000. There are hundreds of millions of property claims reported and settled each year totaling billions of dollars.
Typically a claim is reported to the agent or insurance company over the phone or faxed into the company. The claim is matched to the coverage and assigned to an adjuster. That adjuster will investigate the claim, document the cause of loss, confirm that the loss is covered, adjust and pay the claim, if covered. The expense associated with this process is referred to in the industry as the loss adjustment expense.
An insurance company's combined ratio is the dollar value of the loss (called severity) plus the loss adjustment expense. The industry strives for a combined ratio under $1.00, that is, for every $1.00 collected in premiums, the losses should be less than $1.00. Historically they will run $1.05 to $1.20 or higher for individual claimants. This means that for every dollar of premium collected, the insurance company is paying out $1.05 to $1.20 or higher in covered damages plus loss adjusting expense. To survive, the insurance company must control costs and provide quality claim service. Accordingly, a need exists for a better method of processing and paying claims.